USING COMPETITION ASSESSMENT TO ACHIEVE BETTER REGULATION

Workshop hosted by the Icelandic Competition AuthorityReykjavik, 3 December 2015

Ania Thiemann, Head of Global RelationsCompetition Division, OECD

Competition, regulation and economic growth

• Established: 1961

• Headquarters: Paris

• OECD Centres: Berlin, Mexico City, Tokyo, Washington, Jakarta

• Members: 34 countries

• Secretary-General: Angel Gurría (Mexico)

• Secretariat staff: 3000

• Annual budget: 354 € million (2013)

• Official languages: EN – FR

• Publications: 250 new titles per year

• Work participation: Nearly 300 expert committees and working groups with participation of +100 countries

• www.oecd.org/about/

OECD Key Facts

CleanerStronger

Fairer

Competition

Trade

Education

Employment

Healthcare

Migration

Finance

Tax

evasion

Corruption

Fiscal policy

Energy

Innovation

Climate

change

OECD Better policies/lives from every angle

Development

assistance

Pensions

Entrepreneurship

Agriculture

Governance

Source: OECD Public Affairs and Communications Directorate

• Objective & mandate:

To protect and promote competition as an organising principle of modern economies, based on the knowledge that vigorous market competition boosts growth and employment and makes economies more flexible and innovative

• Bring together leaders of the world's major competition authorities; chief international forum for dialogue on main competition policy issues

• Issue best practices and standards for better competition policies

• Promote market-oriented reforms by actively encouraging and assisting gov’t decision-makers to tackle anti-competitive practices and regulations

• Assisted by the OECD Competition Division: analytical and advisory support. Promotes its reforms and policies around the globe

Committee: Raison d’être

Agenda for today’s discussion

• Benefits of competition for consumers

• Benefits of competition for firms

• Why do we regulate?

• Can regulation kill?

• Why do we need competition (impact)

assessment?

• Competition assessment fundamentals

• The OECD Competition Assessment Tookit

• Competitive neutrality (if time)5

Benefits of competition – consumer side

Competition leads to substantial reductions in consumer prices

Competition provides greater choice

Competition fosters investment that leads to better quality products

6

Passenger Flights in Europe

Market liberalisation in 1993 led to more intense competition and entry

of low-cost carriers (e.g. EasyJet, Ryanair )

7

Passenger Flights in Europe

Price of the lowest priced carrier had fallen by 36% by 1997 and 66%

by 2002

8

Benefits of competition – the firm side

Drives firms to improve their internal efficiency and reduce costs

Provides incentives to firms to adopt new technology

Provides incentives to firms to invest in innovation

Reduces managerial inefficiency

9

Competition spurs productivity and

growth

• More competitive industries have higher productivity rates and higher productivity growth– Competitive industries enjoy higher annual productivity

growth (Nickell finds 2% gap)

• Virtuous Circle: as products became cheaper and better, consumers buy more and firms’ turnover increases

• Leading to higher productivity and economic growth– EU single market increased productivity

– Countries with stronger competition frameworks have higher growth (World Bank)

10

Competition and Productivity --

Japan’s Dual Economy

0 30 40 50 60 70 80 90 10010

20

40

60

80

100

120

140

160 Steel

Automotive partsMetalworking

Cars

Consumer electronics

Computers

Soap and detergent

Beer

Retail Housing

construction

Food

processing

Employment

100% = 12.5 million employees Source: McKinsey Global Institute

U.S. = 100

Relative productivity levels

Index U.S. = 100

20

11

12

WHY DO WE REGULATE?

A look a regulation, why we need it, and why it may sometimes be an

impediment to competition and growth

Regulation

Markets do not always operate efficiently, need

for state intervention = regulation

Correctly designed regulation has very important

beneficial effects for society (protection for

consumers & environment, health & safety, etc.)

Rules and regulations typically have desirable

socio-economic objectives

BUT

• badly designed regulation can also distort competition

13

In specific circumstances, rules and regulations have the potential to cause harm to the efficient functioning of markets, by preventing new firms entering a market or altering the ability and incentives of firms to compete

We do not question the socio-economic values

Our objective: assess the effects of the regulations on– Extent of competition in the markets

– Incentives for firms to engage in innovative activity

– Potential for growth of the markets

– The usefulness or purpose of the regulation itself

Regulations and their impact on markets

14

Regulations and their impact on markets

For example, medical and other professional associations routinely impose several restrictions

In the name of setting standards, medical associations restrict the number of medical schools, require stringent certification standards, and requirements to practice

We do not question the need to set standards

What we are concerned about is whether the standards are set too high as this very likely will

– Erect barriers to entry and reduce the number of professionals (true for most professions)

– Increase prices and burdens on starting a businesses– Lower the incentives for the professionals to compete in

other dimensions such as quality and variety of care and services

– Potentially be harmful to consumer welfare in the long run

15

Regulations and their Impact on

Markets

• Some of the harmful effects that may arise from the rules and regulations relate to– Unduly high cost burden on firms

– Asymmetric costs across different types of firms

– Erecting barriers to entry (stringent or unreasonable licensing rules, for instance)

– Difficulty in marketing new products, hampering innovation

– Removing incentives to compete

• Regulation can sometimes go horribly wrong…

16

Can pay regulation kill?

• Nurses’ pay in England is set centrally with little local

variation

• Hospitals in high cost areas like London struggle to

recruit and retain staff

• As a result: they treat fewer patients and have lower

quality outcomes – for example, much higher fatality

rates among patients admitted with emergency heart

attacks

• These effects are not trivial: a 10% increase in the

gap (NHS vs. private sector) raises the fatality rate of

people admitted with a heart attack by about 5%• (Propper and van Reenen, Journal of Political Economy, 2010)

17

Why do we need Competition Assessment?

18

Regulation can stifle growth by

hampering productivity

Source - Arnold, J., Nicoletti, G. and Scarpetta, S. (2011). “Does anti-competitive regulation matter for productivity? Evidence from European firms”. IZA Discussion Paper No. 5511.

Increase in multi-factor productivity compared to regulatory stance

Fa

ster

gro

win

g

More regulated

Pro-competitive reform can help

Difference, Australia GDP growth to OECD average

Competition and growth after reform

21

-4

-2

0

2

4

6

8

Australia

OECD - Total

"Hilmer reforms": competition assessment of all new and existing laws

and regulations

Source: OECD. Three-year moving average

Competition helps economic recovery

and employment

Reducing entry barriers increases employment,

e.g.:

• Retail employment in France would be 10% higher

without zoning restrictions according to a study by

Bertrand and Kramarz (2002)

Competition also supports the purchasing power of

consumers

• When a Wal-Mart store is opened in a city, its prices are

between 10 % and 25 % lower for the same products

than in other large retail chains.

22

Product market regulation and

competition issues

23

24

OECD Product market regulation index

Scope of SOEs

Gov’t involvement in network

sectors

Directcontrol over enterprises

Governance of SOEs

Licensesand permits

system

Communi-cation and

simplification of rules andprocedures

Admin.burdens for

corporations

Admin.burdens for

sole proprietor

firms

Barriers inservicessectors

Legal barriersto entry

Antitrustexemptions

Barriers innetworksectors

Barriers to FDI

Tariffbarriers

Differentialtreatmentof foreignsuppliers

Barriers to trade

facilitation

Product market regulation

Price controls

Command and control regulation

State control

Other barriers to trade and

investment

Complexity of

regulatory procedures

Barriers to trade and investment

Barriers to entrepreneurship

Explicit barriers to trade and

investment

Regulatory protection

of incumbents

Involvement in business operations

Public ownership

Administra-tive

burdens on start-ups

PMR Index – 2013

25

Index scale 0 to 6 from least to most restrictive

Source: Economic Policy Reforms 2014: Going for Growth Interim Report - © OECD 2014

26

• The objective is to assess the effect of regulation on

– Extent of competition in the markets

– Incentives for firms to engage in innovative activity

– Potential for growth of the markets

– The (unintended) effect on consumers

A different way of stating the objectives

– We want to avoid restricting competition when making policy

– Better to address concerns related to competition and innovation before a policy is enacted

• Vested interest-groups may make later corrections rather difficult

Why competition assessment?

27

Why the emphasis on assessments?

• Some of the factors relate to– Increasing realisation that markets may work

reasonably well in many industries that traditionally have been heavily regulated

– Change in technology and market conditions warrant re-evaluation of many types of regulations

– Improved quality of regulations may lead to national economies becoming more competitive and innovative, and domestic firms being in a better position to compete globally

• The assessment process involves revision and improvement and should lead to positive change

28

2011 survey : widespread use of CA in

OECD and non-OECD countries

29

0

10

20

30

40

1972

197

4

1976

1978

1980

1982

1984

1986

198

8

1990

1992

1994

1996

1998

200

0

2002

2004

2006

2008

2010

Competition Assessment

Regulatory Impact Assessment

R.I. Recommendation

C.A. Toolkit

C.A. Recommendation

Jurisdictions (32 respondents)

OECD has developed a Toolkit

Applied in

Mexico

Greece

Romania

Competition assessment: examples

Review of existing legislation in Mexico• Multi-year project to improve competitiveness in cooperation with the

OECD• 4 sectors with widespread impacts on competitiveness selected for review• 11 sectors with significant consumer expenditure selected for review• 4 additional areas of cross-sectoral regulation with a high impact on

competitiveness also examined.

Australia review of laws and regulations resulting in substantial restrictions on competition• Over 1800 laws and regulations reviewed over 5 years

Greece Competition Assessment• Approximately 1000 pieces of legislation touching 4 sectors (food

processing, retail trade, building materials, tourism) were reviewed

Reviewed 4 sectors in Greece, totalling

21% of GDP, in 2013

Sector:Food

processingRetail trade

Building materials

TourismHorizontal legislation

Total

Pieces of legislation examined

100 210 46 132 67 555

Recommended for change

54 129 32 76 38 329

OECD Recommendations for reform

valued at €5.2bn annually for Greece*Issue Annual Benefit Number of

provisionsaffected

Value, €m

“Fresh” milk €33m (consumer benefit/year) 2 33

Levy on flour €8m-11m (value of levy/year) 1 8

Sunday trading€2.5bn (annual expenditure), plus 30,000 new jobs

3 2 500

Sales and discounts €740m (annual turnover) 9 740

Over the Counter pharmaceuticals €102m (consumer benefit/year)

23 102

Marinas €2.3m (annual turnover) 10 2

Cruise business €65m (annual turnover) 4 65

Advertising €1.8b (consumer benefit/year) 14 1 800

Everything else ??? 263 ???

Total: €5.2bn + ???* Based on available data at the time of the project.

The Competition Assessment Toolkit

• With this in mind, we

– Outline the OECD’s Competition Assessment Toolkit and methodology

– Highlight some potentially problematic categories of regulations

– Work through the Competition Assessment Toolkit’s Checklist

– Look at examples of laws and regulations through the lens of the Checklist evaluation process

34

Coming up:

Competition

Assessment Toolkit and

Fundamentals

35

OECD Competition Assessment Toolkit

www.oecd.org/competition/toolkit

There are often several ways to achieve a specific public goal, and some policies restrict competition more than others.

Since consumers benefit from more rather than less competition it is useful to identify which restrictions to competition are not strictly necessary for the pursuit of public goals.

OECD Competition Assessment Toolkit (CAT) provides a general methodology for identifying unnecessary barriers and developing alternative, less restrictive policies that still meet government objectives.

Competition Assessment Toolkit (CAT)

• Designed for government officials in decision-making roles and staff who will conduct the assessments

• The “Guidance” volume details the framework and the steps needed to implement competition assessments

• CAT aims to provide

– Institutional options for competition assessments

– Integrating competition assessments into regulatory impact analysis

• The CAT is a tool that is applied in several stages

OECD Competition Assessment Toolkit

• Step One: A competition assessment checklist

– Designed as an initial screen to “qualitatively” assess rules

and regulations that may be problematic

– Structured to be conducted in short time frame

– Framework is based competition policy and law enforcement,

economic theory and on empirical work

IF potential harm to competition is identified, then a more

detailed review is recommended

• Step Two: Detailed competition assessment

– Designed to fully and “quantitatively” evaluate rules and

regulations that may cause significant harm

– Propose alternative regulations to minimise harm to

competition

• The checklist consists of four core

questions

A YES answer to any of the four

questions would signal a competition

concern

and warrant a detailed review of the rule

or regulation under consideration

Competition Assessment ChecklistInitial Screening Based on the Checklist

The check-list

4 basic questions with a yes/no answer

• Do the rules/regulations limit the number or range of suppliers?

• Do the rules/regulations limit the ability of the suppliers to compete?

• Do the rules/regulations limit the incentives for the suppliers to compete?

• Do the rules/regulations limit the choices and/or information available to the consumers?

IDENTIFY POLICIES TO ASSESS

APPLY CHECKLIST

ANY COMPETITION DISTORTION?

YES NO

IDENTIFY POLICY OBJECTIVE

SELECT BEST OPTION

STOP

IMPLEMENT BEST OPTION

EX-POST ASSESSMENT

STOP

LOOK for ALTERNATIVE

STATUS QUO

Step 1

Step 2

Step 3

Step 4

Step 6

Step 5

41

IS THE RESTRICTION PROPORTIONAL ?

NO

YES

Rules and Regulations – some examples

• Before we discuss the detailed review and

assessment, it is useful to take a quick

look at some selected categories of rules

and regulations that have the potential to

harm competition and innovation in

markets

= red flags

• Some of the problematic categories include

– Regulations that distort market prices

– Regulations that limit advertising and marketing

– Regulations that create entry and mobility barriers

– Granting or extending exclusive rights

– Restrictions on flow of goods, services and capital

– Exempting specific businesses from competition laws

– Rules that set standards and content

– Grandfather clauses

• The CAT “Guidance” volume contains details on each

Problematic regulation

• Regulations that distort market prices

– E.g., ceiling (cap) on prices for a product or service• May reduce firms’ incentives to compete

• May distort firms’ incentives to innovate – reduced incentives to offer higher quality and bring more variety to the market

• The effects on the “average” market price of the product or service is ambiguous

• The quality-adjusted market price may still increase

– E.g., the Government decides to publish prices of specific commodities or services to increase transparency

• May reduce incentives to compete

• May provide a focal point to sustain collusion

Problematic regulation

• Regulations that create entry and mobility barriers

– E.g., local governments restrict entry into the taxi services market by limiting the number of licenses, and put caps on prices

• The cap on the number of licenses very likely results in reduced supply, raising the value of the license

• The ceiling on prices, does not allow taxi companies to adequately recoup the high cost of the licenses

• These effects combine to erect considerable barriers to entry

• Both prices and quality of services are likely to be affected

– E.g., restrictions on various professions

• The local or national licensing restrictions reduce competition

• Consumers potentially face higher prices, and lower quality or reduced variety of services resulting from limited entry and mobility of these professionals

Problematic regulation

Competition Assessment ChecklistInitial screening based on the checklist

• Based on the previous examples we can see that some rules and regulations may entail

– higher market prices

– a reduction in quality and variety of goods and services produced and offered in the market

– potentially lower innovation

• To assess these affects, we use the Competition Assessment Toolkit

• As noted earlier, it is designed as an initial screen to qualitatively assess the impact of rules and regulations on competition

• Important to understand the policy

rationale

• There are important and valid policy

objectives other than competition

– and we can only advise on costs and benefits:

nobody elected us

• Every expert with an interest in the status

quo will say “this sector is different”…

– and occasionally they will be right.

Getting results: understand the reasons

47

STEP 2 – THE DETAILED REVIEW

• Once we have answered YES to the

questions in stage 1, we move on to an in-

depth review

The detailed evaluation would focus on the specific intervention and potential quantification of whether the rule or regulation might

– Impose barriers to entry of new businesses– Force certain types of businesses to exit– Increase the prices of goods and services– Reduce product or process innovation– Significantly increase concentration in the relevant marketAlso: – How will the new regulation or standard affect different

types of firms?– What will be the nature of grandfathering clauses?– How else could the policy goal be reached?

If upstream or downstream markets are affected:– Evaluate effects on the related markets– Initial review– Detailed review

Step 2 – The detailed review

Data commonly subject to measurement include consumer benefits, costs, employment, output, productivity and profitability

Intangible measures of consumer benefits can be both important and difficult to assess • For example, a rule that raises the price or

restricts access to hearing aids will affect the hearing of many people, their social, family and professional interactions will be affected

• Placing a value on the losses from fewer interactions is inherently difficult

50

What is measured?

Estimating the benefits of regulatory

change

P

Q

D

Pr

Pc

Qr Qc

Er

Ec

𝐶𝐵 = 𝜌 +1

2|𝜖|𝜌2 𝑅𝑟

Consumer benefits from reform

With percent price change

ρ, elasticity ε and sector

revenue R, can

approximate consumer

benefits (CB) of change

May find elasticity

estimates from

comparable

products/other

countries, if not locally

available

Default value for

price change may

come from range of

published estimates

of price impacts for

that type of checklist

restriction

51Ennis, S. (2013) mimeo

52

What is the expected price change?

Mean

price

change (ρ)

(absolute

value in

ratio of

price

decline)

Range

Number

of

results

Category and sub-category of regulatory restriction

0.21 115 (A) Limits the number or range of suppliers

0.23 -0.9 to -0.006 35 1 Grants exclusive rights for a supplier to provide goods or services

0.12 -0.31 to -0.003 10 2 Establishes a license, permit or authorisation process as a requirement

of operation

0.17 -0.416 to -0.040 15 3 Limits the ability of some types of suppliers to provide a good or

service

0.24 -0.75 to -0.002 41 4 Significantly raises cost of entry or exit by a supplier

0.13 -0.36 to -0.04 10 5 Creates a geographical barrier to the ability of companies to supply

goods services or labor, or invest capital

0.18 68 (B) Limits the ability of suppliers to compete

0.20 -0.80 to -0.10 29 1 Limits sellers’ ability to set the prices for goods or services

0.21 -0.65 to -0.01 12 2 Limits freedom of suppliers to advertise or market their goods or

services

0.11 -0.308 to -0.001 13 3 Sets standards for product quality that provide an advantage to some

suppliers over others or that are above the level that some well-informed

customers would choose

0.28 -0.70 to -0.069 11 4 Significantly raises costs of production for some suppliers relative to

others (especially by treating incumbents differently from new entrants)

Source: OECD (2015), forthcoming

E

X

T

R

A

C

T

Where do these figures come from?

53

We welcome suggestions for additional case

studies!

Source: OECD (2015), forthcoming

54

OECD’s Competition Assessment

Toolkit

• 2007: Toolkit published to assist

officials in competition

assessment of new or existing

laws and regulations

• 2009: OECD Council

Recommendation, endorsing use

• 2010: updated

• Now available in two volumes, in

17 languages

• 2015: Volume 3 approved for

release, updated volumes 1 & 2

Materials

All OECD Competition Assessment Toolkit related

materials in 17 languages can be found here:

http://www.oecd.org/daf/competition/assessment-

toolkit.htm , including reports from Greece and

Mexico and updates on Romania

Soon to be published: revised and updated version

and a new vol. 3 – Operational Manual

ICN Recommended Practices on Competition

Assessment

http://www.internationalcompetitionnetwork.org/uplo

ads/library/doc978.pdf

55

THANK YOU FOR YOURATTENTION!

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